Question

Charles Ltd. earned a profit of * 1,00,000 after charging depreciation of 20,000 on assets and a transfer to General Reserve of 30,000. Goodwill amortised was 7,000 and gain on sale of machinery was 3,000. Other information available is (changes in the value of Current Assets and Current Liabilities): trade receivables showed an increase of 33,000; trade payables an increase of 76,000; Prepaid expenses an increase of 200; and outstanding expenses a decrease of 2,000. Ascertain Cash Flow from Operating Activities. (NCERT, Modified) [Ans.: Cash Flow from Operating Activities = 1,54,800; Net Profit before Tax = 1,30,000.]

Answer 1

Cash Flow from Operating Activities for Charles Ltd. is calculated by adding back non-cash charges and adjusting for changes in working capital to the profit after tax. The result is a cash flow of 1,54,800 from operating activities.

Step-by-step explanation:

To ascertain the Cash Flow from the Operating Activities of Charles Ltd., we first calculate the Net Profit before tax and changes in working capital. The Net Profit before tax is calculated as follows: Profit after depreciation, reserves, amortization, and gain on sale of machinery, which is 1,00,000 (Profit) + 20,000 (Depreciation) + 30,000 (General Reserve) + 7,000 (Goodwill amortized) - 3,000 (Gain on sale) = 1,54,000 Net Profit before Tax.

Next, we adjust for the changes in working capital items: Increase in Trade Receivables (33,000), Increase in Trade Payables 76,000, Increase in Prepaid Expenses (200), and Decrease in Outstanding Expenses 2,000. The total change in working capital is (33,000) + 76,000 - 200 + 2,000 = 44,800. Therefore, Cash Flow from Operating Activities is Net Profit before Tax 1,54,000 + Change in Working Capital 44,800 = 1,54,800.